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Evaluating Minimum-Traffic Guarantees for PPPs in Turkey by Real-Option Pricing

Author

Listed:
  • Ilker Ersegun Kayhan

    (Chevening/Abdullah Gül Research Fellow, Oxford Center for Islamic Studies, University of Oxford)

  • Glenn P. Jenkins

    (Queen’s University, Canada and Eastern Mediterranean University, North Cyprus)

Abstract

Minimum-traffic guarantees for build-operate-transfer toll-road projects are contingent liabilities that expose government to fiscal risk. Therefore, public authorities must value guarantees, thereby enabling informed decision-making about the level and type of guarantee provision. This study demonstrates the use of financial modeling and risk analysis in a toll-road project in Turkey, contributing to the narrowing of a capacity gap in the field. We present three types of guarantee, modeled as real options and evaluated by Monte Carlo simulation. We identify one criterion to determine the optimum level of guarantee for a given project, and one criterion to measure the extent to which a guarantee will reduce risk. Based on these and other complementary criteria, it is proposed that the guarantee with income ceiling is the most appropriate for the project considered here. The paper concludes with a discussion of the policy implications of the findings.

Suggested Citation

  • Ilker Ersegun Kayhan & Glenn P. Jenkins, 2016. "Evaluating Minimum-Traffic Guarantees for PPPs in Turkey by Real-Option Pricing," Development Discussion Papers 2016-02, JDI Executive Programs.
    • Handle: RePEc:qed:dpaper:284
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    References listed on IDEAS

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    More about this item

    Keywords

    Contingent liabilities; government guarantees; real options; cost-benefit analysis; public-private partnerships; infrastructure; Turkey.;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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